intrnal audit function and performance of local

1

MAKERERE UNIVERSITY

INTRNAL AUDIT FUNCTION AND PERFORMANCE OF LOCAL

GOVERNMENTS OF UGANDA

A CASE OF NAKASEKE DISTRICT LOCAL GOVERNMENT

PRESENTED BY

ALINAITWE JENNIFER

REG. NO. 07/ U/ 6497/EXT

SUPERVISED BY

Ms VICTORIA. B. NAKKU

ARESEARCH REPORT SUBMITTED TO THE COLLEGE OF BUSINESS

AND MANAGEMENT SCIENCES IN PARTIAL FULFILMENT

OF THE REQUIREMENT FOR THE AWARD OF

A DEGREE OF BACHELOR OF COMMERCE

MAKERERE UNIVERSITY.

JUNE 2011

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DECLARATION

I Alinaitwe Jennifer hereby declare that this proposal is as a result of my original work. It has

never been presented in any University or any other institution of higher learning. Where

work of others has been used due acknowledgement has been made.

Signed.........................................

Alinaitwe Jennifer

07 / U/ 6497 / EXT

Date...............................................

ii

APPROVAL

This is to certicisfy that Ms Alinaitwe Jennifer carried out this research under my supervision

Signed................................................ Date......................................

Ms VICTORIA. B. NAKKU

SUPERVISOR

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DEDICATION

I dedicate this work to my loving parents Mr and Mrs Kaboogoza Steven who worked

tirelessly to see my education through.

Likewise I dedicate this work to my entire family especially my loving sisters; Jolly, Sarah,

Jackie and Joan. Aunt Sarah, Uncle Robert and my grandparents Mr and Mrs Byaboona

Emmanuel for their prayers, encouragement and support during my course of education may

God bless you.

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ACKNOWLEDGEMENT

I thank the almighty God for bringing me this far in life.

I am very grateful to my supervisor Ms Victoria B Nakku who provided me with guidance

which enabled me to complete this study.

In a special way, i thank my mother who tirelessly worked hard to provide me with all the

financial support without which this study would not have been possible. I am further

indebted to the management and political leaders of Nakaseke District Local Government

who provided me with information that enabled me to complete this study.

I am also grateful to my lectures and fellow colleagues of BCOM 2007/2011 especially Paul,

Aggrey and Betty for their academic support and encouragement. I also extend thanks to my

relatives especially Ms N. Rosette and K .Winy including all those that I have not mentioned

in this acknowledgement that in any way provided me with support that enable me to

complete this study. I will remember you for all that you have done for me.

Thank you very much.

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ABSTRACT

This research was done with the purpose of evaluating the internal audit function of

Nakaseke Local Government and the performance of Local Governments. The definition of

both the independent variable and the dependent variable were discussed together with the

problems hindering the performance of internal audit function and the performance of local

governments. Conceptual frame work that reflected the variables whose relationships were

studied was developed.

The following were the specific objectives. To examine the effectiveness of the internal Audit

function in Uganda’s District Local Government. To identify the controls that have been put

in place to help improve performance of Local Governments. And to analyse the relationship

between internal audit and the performance of Local Governments of Uganda.

A combination of cross-sectional and descriptive research design was used applying both

quantitative and qualitative techniques. The study population was 45 being a total population

of Nakaseke District Local Government workers. Out of these a sample of 40 individuals was

selected by employing simple random and purposive sampling techniques.

The findings revealed that there existed positive relationship between the variables of study as

conceptualised and that local Government performance had generally been fairy satisfactory

and that internal Audit function in Local governments was also fairy performing. The fair

performance being attributed to lack of complete independence of the internal auditors,

inappropriate internal controls, and managements’ reluctance to attend to the

recommendations of the internal auditor produced.

In a bid to improve performance, the district management should ensure that politicians have

limited influence in the works of the internal auditor and that internal controls are always

reviewed and evaluated so that they are limited to manipulations and also put in place or

strengthen disciplinary measures regarding manipulation or override of these controls.

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TABLE OF CONTENTS

DECLARATION.................................................................................................................... i

APPROVAL.......................................................................................................................... ii

DEDICATION ..................................................................................................................... iii

ACKNOWLEDGEMENT .................................................................................................... iv

ABSTRACT ...........................................................................................................................v

TABLE OF CONTENTS...................................................................................................... vi

LIST OF TABLES ............................................................................................................... ix

LIST OF FIGURES ................................................................................................................x

LIST OF ABBREVIATIONS ............................................................................................... xi

CHAPTER ONE ....................................................................................................................1

1.0 Introduction ......................................................................................................................1

1.1 Background ......................................................................................................................1

1.2 Problem statement ............................................................................................................2

1.3 Purpose of the study..........................................................................................................2

1.4 Research objectives ..........................................................................................................2

1.5 Research questions ...........................................................................................................3

1.6 Conceptual framework ....................................................................................................3

1.7.0 Scope of the study ..........................................................................................................4

1.7.1 Subject scope .................................................................................................................4

1.7.2 Geographical scope ........................................................................................................4

1.7.3 Time scope ....................................................................................................................4

1.8 Significance of the study ...................................................................................................4

CHAPTER TWO ....................................................................................................................5

LITERATURE REVIEW .......................................................................................................5

2.0 Introduction ......................................................................................................................5

2.1 Internal Audit ...................................................................................................................5

2.2 Definition of internal control systems ...............................................................................6

2.3 Objectives of internal control system ................................................................................6

2.4.0 Internal control systems .................................................................................................7

2.4.1 Control environment ......................................................................................................7

2.4.2 Risk Assessment ............................................................................................................8

2.4.3 Control activities ............................................................................................................8

2.4.4 Information and communication ....................................................................................9

2.5 The independence of internal audit department ............................................................... 10

2.6 Performance of Local Governments ................................................................................ 11

2.7 Internal audit in relation to service delivery .................................................................... 12

2.8 Internal audit and performance........................................................................................ 13

2.9 About the case study ....................................................................................................... 14

CHAPTER THREE .............................................................................................................. 15

Methodology ........................................................................................................................ 15

3.1 Introduction .................................................................................................................... 15

3.2 Research design .............................................................................................................. 15

3.3 Study Population ............................................................................................................ 15

3.4 Sampling techniques and procedures ............................................................................... 15

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3.5 Sample size ..................................................................................................................... 15

3.6 Data collection, Instruments and Data source .................................................................. 15

3.6.1 Source of data .............................................................................................................. 15

3.6.2 Instruments .................................................................................................................. 16

3.7 Data processing and Analysis ......................................................................................... 16

3.7.1 Data Analysis............................................................................................................... 16

3.8 Limitations of the study .................................................................................................. 16

CHAPTER FOUR ................................................................................................................ 17

PRESENTATIONS AND DISCUSSION OF FINDINGS .................................................... 17

4.0 Introduction .................................................................................................................... 17

4.1.1 Findings on the gender of respondents ......................................................................... 17

4.1.2 Findings on the age bracket of respondents .................................................................. 17

4.1.3 Findings on the education level of the respondents ....................................................... 19

4.1.4 Findings on the working department of the respondents ............................................... 20

4.1.5 Findings on the working period with the organization .................................................. 21

4.1.6 Findings on whether the internal Audit department is independent from others ............ 21

4.1.7 Findings on whether the internal Audit’s reporting relationship is appropriate.............. 22

4.1.8 Findings on whether the internal Audit has access to departmental heads ..................... 22

4.2.0 Findings on whether the Auditors follow internal controls when verifying transactions 23

4.2.1 Findings on whether political leaders usually influence Audit work ............................. 24

4.2.2 Findings on whether the internal audit is consistent with the organization’s size,

complexity of operations and the level of growth. ................................................................. 24

4.2.3 Findings on whether the Auditors possess the skills and knowledge ............................. 25

4.2.4 Findings on whether the internal Auditor operates with a formal charter ...................... 25

4.2.5 Findings on whether internal audit facilitates risk and self – control assessment ........... 26

4.2.6 Findings on whether there are clear management statements on risk management and

internal controls in the organization ...................................................................................... 26

4.2.7 Findings on whether internal audit identifies areas of risk within the organization and

structures the overall Audit approach to cover these risks. .................................................... 27

4.2.8 Findings on whether internal Audit identifies and profiles its member’s needs and

expectations. ......................................................................................................................... 27

4.2.9 Findings on whether internal audit has moved away from being reactive to being

proactive. .............................................................................................................................. 28

4.3.0 Findings on whether internal auditors routinely capture information on performance

effectiveness and operational efficiency. ............................................................................... 28

4.3.1 Findings on whether the organization’s senior management is receptive to all

communications controls including the bad news. ................................................................. 29

4.3.2 Findings on whether the importance of risk management and controls has been

communicated through out the organization.......................................................................... 30

4.3.3 Findings on whether the internal audit has a comprehensive internal monitoring

program. ............................................................................................................................... 30

4.3.4 Findings on whether the internal audit through its monitoring function has enhanced the

organizations corporate code of conduct ............................................................................... 31

4.3.5 Performance of local governments ............................................................................... 31

4.3.6 Findings on whether the district local government provides works and water facilities to

the community in terms of roads rehabilitation and maintenance .......................................... 31

4.3.7 Findings on whether the district local government carter for the construction of teachers

houses, classrooms, Toilets and offices in all government primary schools ........................... 32

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4.3.8 Findings on whether the district local government provides health services such as

medicine, immunization, counselling, drugs in all health units free of charge ....................... 32

4.3.9 Findings on whether Local Government activities are implemented as planned in the

Work plan............................................................................................................................. 33

4.4.0 Findings on whether the District Publi Accounts Committee always reviews internal

Audit reports. ....................................................................................................................... 33

4.4.2 Findings on whether there are no cases of diversion of public funds for personal benefit

within the Local Governments of Uganda. ............................................................................ 34

4.4.3 Findings on the relationship between internal audit function and the performance of

local governments of Uganda ............................................................................................... 34

CHAPTER FIVE .................................................................................................................. 36

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS .................. 36

5.1 Introduction .................................................................................................................... 36

5.2 Summary of findings ...................................................................................................... 36

5.2.1 Performance of internal Audit ...................................................................................... 36

5.2.2 Performance of Local Governments ............................................................................. 36

5.2.3 Relationship between Internal Audit and Performance of Local Governments .............. 37

5.3 Summary of conclusions ................................................................................................. 37

5.4 Recommendations .......................................................................................................... 38

5.5 Areas of further research ................................................................................................. 38

REFERENCES ..................................................................................................................... 39

APPENDICES .................................................................................................................... 42

APPENDIX I: QUESTIONNAIRE ...................................................................................... 42

APPENDIX II: INTRODUCTORY LETTER ...................................................................... 47

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LIST OF TABLES

Table 1: Showing the Gender of respondents ....................................................................... 17

Table 2 : Age bracket of the respondent .............................................................................. 17 Table 3 : Period at work of the respondents ........................................................................ 21

Table 4: Independence of the intrenal audit department from others ..................................... 21 Table 5 : Reporting relationship of internal Audit ................................................................ 22

Table 6: Intrenal Audit’s accessibility to departmental heads ............................................... 22 Table 7: Freedom and objectiveness of the internal Auditors ............................................... 23

Table 8: Auditors strictness when verifying transactions ....................................................... 23 Table 9: Political leaders influence in Audit work ................................................................. 24

Table 10: Internal audit’s consistence with organisations size ............................................... 24 Table 11: Possession of Auditor’s skills and knowledge ....................................................... 25

Table 12: Internal Audit’s operation with a formal charter .................................................... 25 Table 13: Internal Audit’s facilitation of risk and self- control assessment ............................ 26

Table 14: Management statements on risk management and internal controls ....................... 26 Table 15: Identification of areas of risk within the organisation ............................................ 27

Table 16: Identification and profiling of members needs and expectations by the internal

audit. .................................................................................................................................... 27

Table 17: Internal audit’s move from reactive to proactive. .................................................. 28 Table 18: Capturing of information on performance effectiveness and efficiency.................. 28

Table 19: Senior management’s reception to all communications ......................................... 29 Table 20: Communications on the importance of risk management and controls ................... 30

Table 21: Comprehensive internal monitoring program of the internal audit. ........................ 30 Table 22: Enhancement of the organisation’s corporate code of conduct by the Internal Audit

............................................................................................................................................. 31 Table 23: Provision of works and water facilities to the community by the district ................ 31

Table 24: Construction of teacher’s houses, classrooms, toilets and offices. .......................... 32 Table 25: Provision of health services such as medicine, immunisation and drugs. .............. 32

Table 26: Implementation of local government activities as planned in the Work plan .......... 33 Table 27: Review of Audit reports by the Public Accounts Committee ................................. 33

Table 28: Diversion of public funds for personal benefit. ..................................................... 34

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LIST OF FIGURES

Figure 1 : Conceptual framework ...........................................................................................3

Figure 2: Age bracket of the respondents ............................................................................. 18

Figure 3: Level of education of the respondents .................................................................. 19

Figure 4 : Working the department of the respondents ........................................................ 20

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LIST OF ABBREVIATIONS

LGA: Local Government Act

IAPS: International Auditing Practice Statements

IAS: International Accounting Standards

PAC Public Accounts Committee

LGFAR: Local Government Finance and Accounting Regulations

COSO: Committee of sponsoring organisations of Treadway commissions

SPSS: Statistical Package of Social sciences

SPPIA: Standards for Professional Practice of Internal Auditors

SAS Statements on Auditing Standards

COBIT Control Objectives for Information Technology

SAC System Assurance and Control

TQM Total Quality Management

SDLC System Development Life Cycle

AGM Annual General Meeting

SAI Supreme Audit Institutions

SFG School Facilitation Grant

NLG Nakaseke Local Government

LCV Local Government Five

1

CHAPTER ONE

1.0 Introduction

1.1 Background

Internal audit is an independent appraisal function with the organisation set up for the view of

systems of controls and quality performance (khalisa 2000). The new definition of internal

audit defines the function as an impendent objective assurance and consulting activity

designed to add value and approve an organisation’s operations. (Albert et al 2002) .Section

90 of the Local Government Act 1997 provides for the establishment of the internal audit

departments in the local governments with a view of assisting the Local Government provide

public goods and services in an effective, efficient and economic manner. As a service

department to the organisation, the internal audit function objectively examines, evaluates and

reports on the adequacy of internal controls as a contribution to proper economic use of

resources. The internal audit is autonomous and reports directly to the district council.

According to section 91 of the Local Government Act 1997, the department is responsible for

verification of accounting records and any other roles as stated in section 91 of the Local

Government Act (LGA) 1997 for all district departments.

The Local Government Act amended (2002) section 91 provides that every district, Municipal

council or town shall provide for an internal department in order to foster financial

management. Its head is charged with preparing quarterly reports and submit them to the

council giving a copy to the Local Government Accounts Committee. As a means to enhance

good performance the auditors should do their work professional scepticism and due care.

However in Local Government s the audit department is faced with problems of inadequate

staff that are allocated by the chief finance officer, inadequate facilities to monitor all the

roles stated by the Local Government Act, poor segregation of duties and lack of

independence of the internal auditors. Inadequate records and equipment, threats of being

merged with accounts department, poor perception of people of the roles of Auditors, and

interference by the politicians who engage in acts not stipulated in the Local Government Act

amended 2000 and in the Local Government Finance and Accounting Regulation Act 1998

(LGFAR), hindering independence of the Audit department for example councillors awarding

themselves tenders.

2

Performance in business refers to the ability to meet the standards, increased market share,

improved facilities, ensuring returns on profitability, and total waste reduction and once this is

achieved, a business is said to be performing effectively (Bulunywa 1998). Performance of an

organisation can be measured in terms of financial aspects, profitability risk levels, proper

book keeping good evaluation and time management.

The International Auditing Practice Statement (IAPS) 2003, states that the need for an internal

audit functions will usually be governed by size, risk, and complexity of a business. The

board’s role in relation to internal audit is to understand and take committee. According to

Ellis internal audit is not special thus the auditors must be able to justify internal auditor’s

existence just like any organisation to achieve its objectives. However the achievement of

these objectives is hindered by risk and it is these risks that audit is all about.

1.2 Problem statement

Despite the structure of the finance department that was put in place by Nakaseke Local

Government to verify, evaluate and examine book keeping records in accordance with the

Local Government Finance and Accounting Regulation 1998, and the audit manual 2000,

preventing and detecting fraud, misappropriation of such funds is used inefficiently and

ineffectively.

Since 2006, several employees in the accounts department have interdicted due to

misappropriation of funds meant for Local Government development projects and salaries for

other employees as reported by the Public Accounts Committee (PAC) report 2008 and the

auditor general report for the year ending 30th

June 2008. The researcher therefore sought

whether internal Audit functions, have an effect on the performance of Local Government.

1.3 Purpose of the study

The purpose of the study was to establish the relationship between internal Audit functions

and the performance of Local Governments in order to establish if its functions are some of

the reasons for the district’s poor performance.

1.4 Research objectives

i. To examine the effectiveness of the internal audit functions in Nakaseke Local

Government

ii. To identify any controls that help improve the performance of Local Government

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iii. To find the relationship between the internal audit and the performance of Nakaseke

Local Government.

1.5 Research questions

i. How effective is the internal audit function in Nakaseke Local Government?

ii. What controls have been put in place to improve performance?

iii. What is the relationship between internal audit functions and performance of Local

Governments

1.6 Conceptual framework

Figure 1 : Conceptual framework

INDEPENDENT VARIABLE DEPENDENT VARIABLE

Internal Audit Function Performance of Local Government

Internal control systems Provision of public services

Source: Developed by the researcher from several literature reviews.

This conceptual frame work has been developed form the existing concepts on internal audit

as reflected in the new definition of internal auditing by the institute of internal Auditors,

(1999).the main independent variable is internal audit function while the dependent variable is

performance of local governments. Internal audit is studied in two dimensions; internal

controls systems and independence. The dependent variable is analysed in terms of provision

Construction of schools

Health care

Construction of roads

Works and water

Moderating variable

Independence

Control environment

Risk assessment

Information and

Communication

Control activities

Monitoring

4

of public services by the local government; construction of roads, provision of health services,

and provision of works and water.

1.7.0 Scope of the study

1.7.1 Subject scope

The study focused on the impact of internal audit functions on the performance of Local

Government. It covers the roles and adherence of the Audit staff, problems and weakness of

internal department, independence in proper verification of books of accounts by the internal

Audit in relation to performance of Local Government.

1.7.2 Geographical scope

The study focused on Nakaseke Local Government

1.7.3 Time scope

The study was carried out basing on the Local Government performance from 2006 to 2009

1.8 Significance of the study

i. Increase the awareness of the role of internal Audit as a foundation for proper

accounting for resources as a basis of good Local Government performance.

ii. Findings of the study will reveal the position of the internal audit function in the

organisation as to whether it adds value or not to the performance of the organisation

iii. To bring to the attention of managers and staff the wrongs of fraud and theft and also

for the public to appreciate the managers jobs.

5

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This concerns review of the available literature by scholars and academicians in the line with

the conceptual framework

2.1 Internal Audit

Foulks (2004) defines internal audit as an appraisal activity established by management for

the review of accounting and internal control systems as a service to the entity. Section 90 of

the Local Government Act 1997, stipulates that every district, city council or town council

shall provide for an internal Audit. In addition, section 172 of the Local Government

Financial and Accounting Regulations, 1998, stipulates that internal Audit shall report on the

system and operations of the Local Governments under their jurisdiction whether efficient,

effective, economical and free from fraud and other malpractices and give recommendation

for their elimination. Golooba, (1999), asserts that there must be independent and effective

supervisory mechanisms capable of preventing or combating malpractice regardless of a kind

leadership in place In order to help minimize incidences of malfeasance, incompetence, or

sheer dereliction of duty.

An internal Audit is a process ( carried out by suitably qualified Auditors ) whereby the

accounts of business entities including limited companies, charities trusts, professional firms,

are subjected scripting in such detail as will enable the Auditors to form an opinion as to

their accuracy, truth and fairness. This opinion is then embedded in an “Audit report”

addressed to interested parties who commission the Audit or to whom the Auditors are

responsible under the statute (Emile Woolf)

Internal Audit is an independent appraisal function established by management of an

organization for the review of internal control system as service to the organization to

examine, evaluate and report on the accounting and other controls on operations. It exists

either voluntarily or in certain situations because of the statutory requirements (Manasseh,

1991)

According to Attwood (1986) internal audit is defined as an element of internal control

system set up by management as a method of imposing controls..

6

2.2 Definition of internal control systems

Foulks, (2004), defines internal control system as comprising the control environment and

control procedures adopted by directors and management of an organization in achieving its

objectives by ensuring practical, orderly and efficient conduct of an organization. This may

include adherence to policies, safe guarding assets, prevention and detection of fraud accuracy

and competences of accounting records and timely preparation of financial reports.

According to Whittington, (1999), an internal control system consists of policies and

procedures established to provide reasonable assurance that the organization’s related

objectives are achieves. The concept of reasonable assurance recognizes that no structure is

perfect and that the cost of the entity’s internal control should not exceed the benefits to be

derived.

Internal control may be defined as the whole system of controls, financial and otherwise,

established by the management in order to carry on the business of the company in an orderly

manner, safeguard its assets and secure as far as possible the accuracy and reliability of its

records. It will be observed that the concept of internal control goes beyond financial and

accountancy matters and the custody of company assets to include controls designed to

improve operational efficiency and ensure adherence to company policies (Coopers and

Lybrand, Manual on Auditing 4th Edition)

2.3 Objectives of internal control system

Consistent with the firm’s objectives of maintaining optimum cash balance in order to meet

the firm’s obligations and when they fall due, and aware of the different risks associated with

the various sources and uses of funds, it is important to streamline the policies and procedures

for accessing, using, recording and custody of cash. (Pandey, 1995)

According to Swamy, (1994), internal controls in accounting system serves the function of

ensuring that all transactions carried out are suctioned that authorized by management. This is

important because all activities of the organization are performed in line with the laid down

policies.

All transactions should be accounted for in the relevant books of accounts regularly, correctly

and systematically (Millichamp, (1996)

This should be according to the application reporting framework, like the relevant legislation

and applicable Accounting Standards. (Foulks, 2005), this should lead to proper

accountability of all assets and liabilities of the firm.

7

2.4.0 Internal control systems

According to the Standards for Professional Practice of Internal Auditors (SPPIA 2002),

internal control comprises the plan and methods of the organization adopted to safeguard

assets, comply with the laws and regulations, ensure the completeness and correctness of

accounting data, promote efficiency and encourage adherence to management policies.( Katz

2004), argues that to ensure the goals and objectives of a financial institution are properly

met, that the company will achieve long-term profitability targets, and maintain reliable

financial and managerial reporting, a system of strong internal controls must be in place.

COSO (1992), states that company management should continuously and periodically

evaluate the effectiveness of its internal controls (Roth 2004) Confirms further that frauds that

caused the collapse of Enron and world could not have arisen from the non compliance with

low-level accounting procedures. The root cause is always a breakdown in the control

environment usually the ethical climate and behavior of executives.

Consistent with the COSO frame work (1992), Lannoye, 1999, identified five inter- related

components of internal control i.e. control environment, risk assessment, information and

communication, risk assessment, information, and communication, control activities and

monitoring derived from methods used by agencies to conduct their business Crawford (2000)

agree with (Lannoye 1999) and added that the five elements replaced the historical one

element. Control activities and helped to redefine internal control as anything an organization

does to ensure the achievement of its objectives.

2.4.1 Control environment

According to Willis and Lightle, (2000) control environment is the tone set by top

management and the overall attitude, awareness and actions of the board of directors,

management, and owners. And others concern the importance of internal control in the

company’s police, procedures methods, and organizational structure. (COSO, 1992) makes it

clear that the control environment is the most important component of internal control konrath

(2003) identifies attributes of control environment as integrity and ethics of management,

competence of employees of employees, operating style of management, structure and Audit

committee and evaluation of the environment.

According to Hubbard (2003) managers and internal auditors need to understand the status of

the factors at the base (control environment), not to change them, but to consider their impact

on the other control components. Chioccola and Muhlstein, (2005) adds that the nature of

many of the soft control is such that they can only be assessed by the employees. Therefore to

8

understand the control environment, auditors interview employees and use self –assessment

workshops and questionnaires.

2.4.2 Risk Assessment

Risk assessment as stated by Lannoye (1999) is the entity’s identification and analysis of

relevant risks (both internal and external) to the achievement of its objectives, forming a basis

for determining how the risk should be managed. This assertion is in consistence with

observations of (Keane 2000).According to chioccola and Muhlstein (2005) the need for

organizations to move to a risk based audit approach has called for risk assessment decisions

to help relate the cost/benefit analysis of the control to the known risk. By understanding the

nature of the business, information system auditors can identify and categorize the types of

risks that will better determine the risk model or approach used in conducting the review.

Bortz (2005) asserts that risk assessment is a process of estimating a riskiness coefficient or

score to be associated with each auditable unit within the organization. Thus risk assessment

is typically undertaken to focus attention on significant audit areas, to allocate scarce audit

resource to the most important audit areas, and to help with key audit prioritizing decision

such as audit frequency, intensity and timing. (Warren, 2003) argues that changes in

economic industry and regulatory environments change entities activities and managing such

changes acquires a constant assessment of risk and the impact on internal controls. Thus

mechanisms are needed to identify and react to changing conditions.

2.4.3 Control activities

According to the Statement on Auditing Standards (SAS) 2002 control activities are the

policies and procedures that help ensure that management’s directives are carried out.

Crowford (2000) states that unit recently, this has been the historical component of internal

control Jago,(2003) asserts that control activities can be categorized as authorization

segregation of duties, record keeping, safeguarding and reconciliations and these controls

depend greatly on the activity under consideration.

Hubbard (2003) argues that a great deal of activity specific knowledge is required to

determine what the controls should be. COSO’s control framework presents a risk control

matrix that analyses activity level objectives risks and control. COSO lists some complete

frameworks or models, that can be used to model control activities such as control objectives

for information technology (COBIT), System Assurance and Control (SAC), Total Quality

Management (TQM) and System Development Cycle (SDLC) depending on the activities

9

involved. Warren (2003) argues that control activities usually involve two elements; a policy

establishing what should be done and procedures to affect the policy.

2.4.4 Information and communication

According to Hubbard, (2003) information refers to employees getting the information they

need to do their jobs, while communication relates to the free flow of information up down,

across, inside and outside the organization. Consistent with Hubbard, (Keane 2000) states that

information and communication system support the identification, capture, and exchange of

information in a form and time frame that enable management and other appropriate

personnel to carry out their responsibilities.

Warren (2003) argues that similar to the control environment auditors cannot evaluate

information and communication without consulting the employees. Thus a self-assessment

process is often used together audit evidence. According to Kannan, (2004), the responsibility

of ensuring appropriate information system covering all activities and the senior management

in regard.

2.4.5 Monitoring

Monitoring is a process that assesses the quality of internal control performance over time

(Willis and Lightle 2000. Lannoye 1999), says periodic evaluations of internal control made

and personnel, in carrying out their regular duties, obtain evidence as to whether the system of

internal control continues to function. Chioccola and Muhlstein, (2005) argues that

organizational structure should include an independent monitoring function of derivatives,

providing senior management with an understanding of the risks of derivative activities,

validating result and assessing compliance with established policies

According to Thornton, (2005) the process of monitoring can be accomplished through

ongoing monitoring activities, separate evaluation or a combination of the two. Ongoing

monitoring occurs in the course of operations and includes regular management and

supervisory activities, and other actions personal take in performing their duties. In line with

Thornton, (Warren, 2003), asserts that the scope and frequency of separate evaluation will

depend primarily on an assessment of risks and the effectiveness of ongoing monitoring

procedures. Thus internal audit should promptly identify internal control deficiencies and

report to top management and the board.

10

2.5 The independence of internal audit department

Independence is mandatory in auditing and is particularly important that the internal auditor

has freedom to select areas of audit he/she wishes to investigate and to report there on to all

levels of management in the organization independence is the fundamental importance in the

effective in the internal Audit. It enables the internal Audit to freely highlight the areas where

fraud could or has occurred as a result of the weak system of control in the organization for

the internal audit to operate effectively, the following principal elements of independence

should be present.

The internal Audit should be independent of all financial system operating within the

organization

The internal audit should at all times have direct access to departmental heads, the accounting

officer and the organizations records and information.

Practice professional due care and skill as prescribed by the institute. The public accounts

committee guideline, October 1988, (Woolf 1994) also emphasized the need for the internal

audit to be independent

The work should be planned and carried out according to the professional roles,

(Ndahura 2001) says that the chief executive should aim at preserving the independent status

of the internal audit function and ensure that it has access to all financial and administration

records of the organization to enable it to ensure management of continuous existence of

financial security, control and transparency

Independence of an auditor is entrained in both the legislation and the code of ethics to be

observed by practicing auditors .The companies act chapter 85, section 159-162 outlines the

procedures for the appointment, remuneration and removal of an auditor. The auditor is

appoint by shareholders and can only be removed by the shareholders during the Annual

General Meeting (AGM) but not the management of the company. Such provisions in the Act

are made to promote objective reporting by the Auditor, it is important that the audit is

independent of management.

According to Ishungisa (2002), internal Auditors should be independent of activities they

audit. They are independent when they can carry their work freely and objectively.

Independence permits internal Auditors to render the impartial and unbiased judgment

essential to the proper conduct of audit. They should be responsible to an individual in the

organization with sufficient authority to promote independence and to ensure broad audit

coverage adequate consideration of audit reports and appropriate action on audit

recommendations .He further argue that internal auditors are not so independent they are

11

employed and responsible to management and politicians and may be punished through non

proportion, no career prospects and other such punishments. Due to such fear they usually get

comprised. Ursula, 2002 argues that there are significant political obstacles to devolve

decision making and enhancing policy responsiveness at the local level.

According to Eonu (2001), the role of audit in the management of finance is a critical one. It

is for this reason that most countries including Uganda have supreme audit institutions to

ensure that the finances of government institutions are audited as discussed by Washo

Supreme Audit Institutions in Uganda (SAI). As derived from this statement, she continues to

say that to be effective in carrying out this enormous responsibility, the audit institution

should be independent of the client.

Eonu (2001) quotes Maugu (1984) who states that the internal audit department has to be

independent in approach, opinion and appearance. It has to be managed by staff that should

strictly adhere to professional ethics laid down by recognized professional accounting bodies

2.6 Performance of Local Governments

Depending on the type of organization, performance may be treated as an end result of an

activity or a process. Organization performance addresses what type of human capital is

required to achieve Local Government’s goals through to structure the local government.

Cain (2004) stated that performance measurement is the mechanism by which firms inform

themselves of their true performance and located un necessary costs through the supply chain.

These can then be converted into substantially higher profits in carefully targeted programs

According to Symcon,(2000), measurement of performance is an integral part of evaluation

and control. Past performance can be benchmark for continued achievement or the catalyst for

change. Without objectives performance measures, it is extremely difficult to make successful

operational and strategic decisions. In contrast with symcom and marchant, (De marco and

Lister 2000) argues that measuring and managing performance in organizations is a

potentially dangerous business that when you measure any indicator of performance, you

incur a risk of worsening that performance.

Stein, (1986), asserts that an audit is a professional service to a client.An auditor may become

liable for damages for negligence to the client or to a third party that relies on the audited

accounts. According to the recurrent and expenditure budget for the financial year 2007/2008,

Nakeseke district budgeted to offer a number of services were provision of health care,

education, construction of health facilities, maintenance of feeder roads, construction of

schools and community based services.

12

The internal Auditor’s report on Nakaseka Local Government on school facilitation grant

(SFG) of 21st June 2006 revealed that full payment was made to the construct of feeder roads

within the locality; however the contractor failed to construct all the roads as it had been

planned.

2.7 Internal audit in relation to service delivery

Internal Audit as part of the organization corporate plan and is expressive of its direction and

how the internal set up is anticipative of the future. Internal Audit and activity programs go

hand in hand (Thompson and struck land, 1987)

According to the report by the inspector general of government, 2002 the success of

decentralization powers, functions, and services is subject to local revenue potential of the

Local Governments and their performance. However, available data in many local

governments indicate that local revenues perform poorly against the annual projections or

budget due to poor auditing carried out. This is evidenced by accumulation of salary arrears,

failure to account for donor funds, failure to fund development projects from local revenues

and poor service delivery.

Ishungisa argues that many internal audit departments do pre- audit as part of their audit

duties especially in public corporations. This is contrary to internal auditing which is the

review of operations. Thus internal auditors do not get time to receive all operations since

Audit staffs are normally few in number. This cause bottlenecks and slows down decision

making. Local governments must meet minimal standards before they can receive

development funds .These include ensuring sufficient financial accounting practices that

working communities are in place and capable of steering investments through the design,

appraisal and implementation process (Ursala G 2002) . Additionally, Local Governments

reports on their performance submit their accounts and must ensure periodic monitory of

investments in order to maintain quarterly payments (Kullenberg and Porter, 2001).

In order for the stake holders to make fruitful decision they need a report on their activities

from

a body, (Folscher 1999), argues that only when civil society is armed with such information

can there be informed public debate on allocation of limited resources

13

2.8 Internal audit and performance

Mc Namee and selim (2000) stated that managers are operating in an increasingly complex of

corporate governance. The emergence of risk management as a key organizational process

gives the internal auditing profession a unique opportunity to shift its focus from control of

functional area to risk. The new paradigm recognizes that risk is the driver of organizational

activity and corporate governance is the organization’s strategic responses to risk.

According to Hespenheide (2003), demonstrating on understanding of the importance of

strong corporate governance is a great opportunity for a company to win in the market place

to owners, that the company is managing their risks and thus a sound investment. (Roth 2004)

observed that good internal controls provide reliable financial reporting for management

decisions and the accomplishment of goals and objectives, poor or excessive internal controls

reduce productivity increase the complexity of processing transaction, increase in the time

required to process transactions and add no value to the activity.

Humprey (2006) asserts that in the process and audit interviews, interactions with internal

auditors, and review of audit reports, employees get a greater understanding of the functions

they perform and why the functions are important. By understanding each task’s significance,

employee can have beyond perfunctory activity to performance excellence. In line with

Humprey 2006, Reanger (2006) says, in addition to identifying weak or overlooked controls,

internal audit lead to process improvement discoveries or efficiency break through and that

such exchanges with internal auditors can provide employees with new perspectives on their

positions, triggering ideas for process improvements or new business possibilities

Gramling (2004) argues that internal audit’s value has been easy to demonstrate over the past

few years as many departments played a significant role in helping their organizations meet

increased compliance requirement. Accordingly, Maletta (2004) adds that audit committees

and management teams are now looking for improvement opportunities within the audit

department, and internal audit leaders are searching for new ways to manage ongoing

performance. This can be achieved by designing an effective performance measurement

framework, implementing quality assurance programs and embedding improvement initiative

in department workflow.

14

2.9 About the case study

A district is made up of several counties and any municipalities in that area. A district is led

by an elected local council V (LCV) chairman and his executive. There is also an elected

LCV council, with representatives from the sub-counties and technical staff in the district.

The council debates budgets, decisions and bylaws. On the technical side, the district is led by

a chief administrative officer, appointed by central government. The district also has heads of

various departments such as education, health, and environment and planning, Works and

Water, which are responsible for relevant matters in the whole of the district. So, the district

education officer of Nakaseke is responsible for education matters in the whole of Nakaseke,

which includes Semuto.

15

CHAPTER THREE

Methodology

3.1 Introduction

This chapter covered the method that was used in the study. It covered six sections which

included; research design, survey population, sampling size, data collection, methods and

instruments, data process and analysis.

3.2 Research design

The study used both descriptive and quantitative research designs. Descriptive method was

used to describe the characteristics of the research variables. Quantitative method was used to

collect data from a given number of respondents. To a lesser extent qualitative method was

also used in order to get opinions from different respondents. The study was also cross-

sectional in nature because the researcher gathered data once over a period of days in order to

answer the research questions.

3.3 Study Population

The survey population included; chief auditors, members from accounting department,

finance department, internal Audit department, and a few members from other departments

within the organisation totalling to 45 people.

3.4 Sampling techniques and procedures

Purposive and simple random sampling methods were used during the study. Heads of

departments were used purposely selected because of their knowledge or information

regarding the area of the study. A simple random sampling technique was used to select the

members from other departments so that they also provide specific views on the internal audit

function and performance of Local Governments.

3.5 Sample size

A sample of 40 respondents was considered out 45 studies.

3.6 Data collection, Instruments and Data source

Data was collected from both primary and secondary sources.

3.6.1 Source of data

The main source of primary data was obtained through self- administered questionnaire,

interviews and observations.

16

Secondary data was obtained from already existing literature that is, from textbooks, journals,

brochures, news papers, other students research work, internet and organisation’s annual

reports.

3.6.2 Instruments

Questionnaires and interviews were designed for the staff and closed ended questions were

used. This enabled respondents to answer the questions with a free mind.

3.7 Data processing and Analysis

Data was scrutinized, edited manually by the researcher to check for accuracy and

completeness.

3.7.1 Data Analysis

Data was presented and analyzed using tables, percentages, frequencies and by the help of

SPSS. This helped the researcher to find the relationship between the variables.

3.8 Limitations of the study

While carrying out the study the researcher experienced the following problems.

1. The researcher did not have enough funds to carry out a very comprehensive study.

This however was overcome through the generous hand outs of relatives and friends

2. Some people were not willing to respond

3. Time to do research was also limited for a comprehensive study to be carried out.

17

CHAPTER FOUR

PRESENTATIONS AND DISCUSSION OF FINDINGS

4.0 Introduction This chapter contains the presentation, interpretation and discussion of the findings to provide

answers to the research problem. The first gives the back ground of the respondents and then

presents the findings. Frequency tables and percentages, by the help of SPSS were used to

analyze data, pie charts and bar graphs were also used to make presentation of data upon

which analytical representation is made. The findings relate to the internal audit function and

the performance of Local governments a case of Nakaseke District Local Government.

4.1.1 Findings on the gender of respondents

From the findings the number of male staff (62.5%) was more than that of female (37.5%)

meaning that the company was gender sensitive.

4.1.2 Findings on the age bracket of respondents

Table 2 : Age bracket of the respondent

5 12.5 12.5 12.5 17 42.5 42.5 55.0 11 27.5 27.5 82.5 7 17.5 17.5 100.0

40 100.0 100.0

Response

18-27 years 28-37 years 38-47 years 48 and above Total

Valid

Frequency Percent Valid Percent Cumulative

Percent

Table 1: Showing the Gender of respondents

25 62.5 62.5 62.5 15 37.5 37.5 100.0 40 100.0 100.0

Response

Male Female Total

Valid


Percent

Source: Primary Data

18

Figure 2: Age bracket of the respondents

EDUCATIO

14 35.0 35.0 35.0

21 52.5 52.5 87.5

5 12.5 12.5 100.0

40 100.0 100.0

postgraduate

Degree holder

Diploma

Total

Valid

Frequency Percent Valid PercentCumulative

Percent

DEPARTME

10 25.0 25.0 25.0

13 32.5 32.5 57.5

7 17.5 17.5 75.0

10 25.0 25.0 100.0

40 100.0 100.0

Accounts

Finance

Internal Audit

Any other

Total

Valid

Frequency Percent Valid PercentCumulativ e

Percent

Source: Primary data.

The data from the figure above reveals that the majority of the workers in the organization

fall under the age group of 28 – 37 (42.5%), followed by those in the age group of 38 – 47

(27.5%) and 18 – 27 years (12.5%). The elderly people form a relative percentage of only

17.5% (48 and above years). This implies that the organization recruits the active age

bracket of 28-37 for effective servicing delivery.

FREQUENCY

18 - 27

28 - 37

38 - 47

48 And above

19

4.1.3 Findings on the education level of the respondents

Figure 3: Level of education of the respondents

Source: Primary data.

From the findings in figure 3 above, 35% of the respondents were post graduates, 52.5% were

degree holders, 12% were of diploma holder and none was found to hold a certificate alone.

It is therefore very clear that the company has got more graduates than diploma holders. This

shows that the Local Government is composed of more skilled man power than casual

labourers hence enabling the researcher to get reliable information from knowledgeable

respondents.

FREQUENCY

Post graduate

Degree holder

Diploma

Certif icate

20

4.1.4 Findings on the working department of the respondents

Figure 4 : Working the department of the respondents

Source: Primary data

From the findings 25% of the respondents were from Accounts department, 32.5% were from

the finance department, with the internal audit department having the 17% and then other

departments contributed 25% to the findings. This implies that the organisation recruits more

in the finance department and accounting hence effective management of the public funds.

0

5

10

15

20

25

30

35

Acounts Finance Internal audit Others

FREQUENCY

PERCENTAGE

21

4.1.5 Findings on the working period with the organization

The data from figure 5 above reveals that most of the people had worked with the

organization for a period of 1 – 5 years with a percentage of 47.5% and 40% was the

percentage of the people who had worked with the organisation for more 5 years with only

12.5% those of less than 1 year. This implies that most of the respondents had enough

information about the organization and hence enabled the researcher to get reliable

information about the organisation.

4.1.6 Findings on whether the internal Audit department is independent from others

From the findings, the biggest percentage (60%) of the respondents strongly agrees that the

internal audit department is independent with 40% being in support of the statement. This

therefore implies that the internal audit performs its work with no interruption of other

departments hence the effectiveness of the audit function.

Table 4: Independence of the internal audit department from others

24 60.0 60.0 60.0 16 40.0 40.0 100.0 40 100.0 100.0

Response

Strongly agree Agree Total

Valid


Percent


Table 3 : Period at work of the respondents

5 12.5 12.5 12.5 19 47.5 47.5 60.0 16 40.0 40.0 100.0 40 100.0 100.0

Response

Less than 1 year 1-5 years More than 5 years Total

Valid


Percent

Source: primary Data

22

4.1.7 Findings on whether the internal Audit’s reporting relationship is appropriate

From table above, 50% of the respondents agreed that the reporting relationship of the internal

audit is appropriate, 42.5% strongly agreed, 5% were not sure and 2.5%disagreed with the

statement. This implies that the reporting relationship of the internal audit in Nakaseke Local

Government is appropriate hence enables the internal auditors to effectively perform their

work.

4.1.8 Findings on whether the internal Audit has access to departmental heads

Table 6 above, majority of the respondent strongly agree that the internal audit has got access

to all heads of department with a percentage of 65% and 35% agreeing. This implies that the

internal auditors can easily reliably rely on the information/reports got form the departmental

heads and hence effectiveness of the internal audit work.

Table 6: Internal Audit’s accessibility to departmental heads

26 65.0 65.0 65.0 14 35.0 35.0 100.0 40 100.0 100.0

Response


Valid


Percent


Table 5 : Reporting relationship of internal Audit

17 42.5 42.5 42.5 20 50.0 50.0 92.5 2 5.0 5.0 97.5 1 2.5 2.5 100.0


40 100.0 100.0

Response

Strongly agree Agree Not Sure Disagree Total

Valid


Percent

23

4.1.9 Findings on whether the Auditors carry out their work freely and with objectivity

According to table 7, most of the respondents Agreed (67.5%) with the freedom and

objectivity of the internal auditor while carrying out their work and only (32.5%) strongly

agreed, none disagreed. This implies that auditors in NLG generally perform their work freely

and with objectivity. This enables them to take fair judgements and strictly enforce adherence

to internal controls.

4.2.0 Findings on whether the Auditors follow internal controls when verifying

transactions

According to table 8, majority of the people agreed (52.5%) and (37.5) strongly agreed that

auditors strictly follow the internal controls when verifying transactions of the organization

however, (5%) were not sure and only (5%) disagreed. This implies that on most occasions

auditors of Nakaseke Local Government follow the internal control systems when verifying

transactions. This was further seconded by the internal Auditor through the interview the

researcher had with him about having an established internal control system. The district was

also using invoices, vouchers, and books of accounts such as ledger books, cash books and

others as controls to the district.

Table 8: Auditors strictness when verifying transactions

15 37.5 37.5 37.5 21 52.5 52.5 90.0 2 5.0 5.0 95.0 2 5.0 5.0 100.0

40 100.0 100.0

Response

Strongly agree Agree Not Sure Disagree Total

Valid


Percent

Source: Primary Data.

Table 7: Freedom and objectiveness of the internal Auditors

13 32.5 32.5 32.5 27 67.5 67.5 100.0


40 100.0 100.0

Response


Valid


Percent

24

4.2.1 Findings on whether political leaders usually influence Audit work

Table 9: Political leaders influence in Audit work

Response

Frequency Percentage Valid

percentage

Cumulative

percentage

Valid Strongly agree

Agree

Not sure

Disagree

Stronglydisagr

ee

Total

3

17

6

10

4

40

7.5

42.5

15.0

25.0

10.0

100.0

7.5

42.5

15.0

25.0

10.0

100.0

7.5

50.0

65.0

90.0

100.0


According to table 9 above, 7.5% strongly agreed that political leaders usually influence

Audit work with 42.5% supporting them, 15% were not sure 25% disagreed and 10% strongly

disagreed. This implies that on most occasions the political leaders do influence the audit

work and hence hindering the efficiency of the Audit work in Nakaseke Local Government.

(i) Control Environment

4.2.2 Findings on whether the internal audit is consistent with the organization’s size,

complexity of operations and the level of growth.

Table 10 reveals that only (35%) agree that the internal audit is consistent with the

organization’s size, complexity of operations and the level of growth, (32.5%) of the

respondents are not sure and (32.5%) disagree. The 32.5% of the members that disagreed

Table 10: Internal audit’s consistence with organisations size

14 35.0 35.0 35.0 13 32.5 32.5 67.5 13 32.5 32.5 100.0


40 100.0 100.0

Response

Agree Not Sure Disagree Total

Valid


Percent

25

show that not all the members understood what was taking place within the organisation.

However the 35% that agreed imply that internal auditors of NLG are consistent with the

organization’s size, complexity of operations and the level of growth hence may be the

contributing factor to the some what performance of the organisation.

4.2.3 Findings on whether the Auditors possess the skills and knowledge

From the findings in table 11 above, (75%) strongly agree that the internal audit possesses the

skills and knowledge with (25%) of the respondents in support of the statement and none

disagreed. This implies that the internal auditors of Nakaseke local government execute their

work with due skills and professional care and hence the efficiency and effectiveness of the

audit work.

4.2.4 Findings on whether the internal Auditor operates with a formal charter

According to table 12 above, (67.5%) of the respondents agree that the internal audit operates

with a formal charter approved by the board, (15%) strongly agree, other (`15%) are not sure

and only (2.5%) disagree. This implies that the internal auditors of Nakaseke Local

Government perform their work in line with the laid down policies and hence one of the

contributing factors to the effectiveness of their work and the some what performance of the

Local Government.

Table 12: Internal Audit’s operation with a formal charter

6 15.0 15.0 15.

0 27 67.5 67.5 82.5

6 15.0 15.0 97.5

1 2.5 2.5 100.0


40 100.0 100.0

Response

Strongly agree

Agree

Not Sure

Disagree Total

Valid

Frequency

Percent Valid Percent Cumulative

Percent

Table 11: Possession of Auditor’s skills and knowledge

30 75.0 75.0 75.0 10 25.0 25.0 100.0 40 100.0 100.0

Response


Valid


Percent


26

(ii) Risk Assessment

4.2.5 Findings on whether internal audit facilitates risk and self – control assessment

According to table 13 above, 32.5% agreed that the internal Audit facilitates risk and self-

control assessment and 5% strongly agreed. However the bigger percentage 35% was not sure

and 25% disagreed with only 2.5% strongly disagreeing. The percentage of 32.5% and 5%

that agreed generally implies that the internal audit facilitates risk and self-control assessment

and fact that the biggest percentage was not sure, this implies that most respondents were not

aware of what was happening within the organisation hence a contributing factor to the

current poor performance of the Local Government.

4.2.6 Findings on whether there are clear management statements on risk management

and internal controls in the organization

According to table 14 above, 50% of the respondents agree and 7.5% are in support of the

statement that there are clear management statements on risk management and internal

controls in the organization, 12.5% are not sure and 30% disagree. The 30% that disagreed

relatively imply that the statements perhaps are not distributed to all departments which leave

most of the people within the organisation ignorant about how to manage risk and hence may

be the contributing factor to inefficient performance of the internal audit in NLG.

Table 14: Management statements on risk management and internal controls

ccccontrolscontrol controls 3 7.5 7.5 7.5

20 50.0 50.0 57.5 5 12.5 12.5 70.0

12 30.0 30.0 100.0 40 100.0 100.0

Response

Strongly agree Agree Not Sure Disagree


Total

Valid

Frequency Percent Valid Percent

Cumulative Percent

Table 13: Internal Audit’s facilitation of risk and self- control assessment

2 5.0 5.0 5.0 13 32.5 32.5 37.5 14 35.0 35.0 72.5 10 25.0 25.0 97.5


1 2.5 2.5 100.0 40 100.0 100.0

Response

Strongly agree Agree Not Sure Disagree 22.00 Total

Valid Frequency Percent Valid Percent

Cumulative Percent

27

4.2.7 Findings on whether internal audit identifies areas of risk within the organization

and structures the overall Audit approach to cover these risks.

From the findings in table 15 above, 37.5% disagree with the question whether internal audit

identifies areas of risk within the organization and structures the overall Audit approach to

cover the risk, 22.5% of the respondents are not sure whereas 30% agree and only 10%

strongly agree. This implies that the internal audit rarely identifies areas of risk within the

organization and this may hence be a contributing factor to the current inefficient performance

of the internal audit function in the Local Government.

(iii) Control Activities

4.2.8 Findings on whether internal Audit identifies and profiles its member’s needs and

expectations.

Table 16: Identification and profiling of members needs and expectations by the

internal audit.

17 42.5 42.5 42.5

19 47.5 47.5 90.0

4 10.0 10.0 100.0


40 100.0 100.0

Response

Strongly agree

Agree

Not Sure

Total

Valid

Frequency Percent Valid Percent

Cumulative

Percent

Table 15: Identification of areas of risk within the organisation

4 10.0 10.0 10.0 12 30.0 30.0 40.0 9 22.5 22.5 62.5

15 37.5 37.5 100.0 40 100.0 100.0

Response

Strongly agree Agree Not sure Disagree


Total

Valid


Percent

28

Table 16 above clearly show that the internal audit identifies and profiles its member’s needs

and expectations since 42.5% strongly agreed and 47.5% of the respondents were in support

of them and only 10% were not sure. This implies that departmental heads get requirements

needed in their departments easily and hence the fair performance of the Local Government.

4.2.9 Findings on whether internal audit has moved away from being reactive to being

proactive.

According to table 17, 7.5% agreed that the internal audit has moved away from being

reactive to being proactive, 7.5% were in support of them, 22.5% were not sure and 62.5%

disagreed with the question. This implies that the internal Audit reacts to events after they

have happened than being proactive being proactive hence this may further be a contributing

factor to the current poor performance of the internal audit function in Nakaseke Local

Government.

(iv) Information and Communication

4.3.0 Findings on whether internal auditors routinely capture information on

performance effectiveness and operational efficiency.

Table 18: Capturing of information on performance effectiveness and efficiency.

31 77.5 77.5 77.5 1 2.5

2.5 80.0

8 20.0 20.0 100.0 40 100.0 100.0

Response

Strongly Agree Agree


Disagree Total

Valid


Percent

Table 17: Internal audit’s move from reactive to proactive.

3 7.5 7.5 7.5 3 7.5 7.5 15.0 9 22.5 22.5 37.5

25 62.5 62.5 100.0 40 100.0 100.0

Response

Strongly agree Agree Not Sure Disagree


Total

Valid


Percent

29

From the above information 77.5% of the respondents strongly agreed that the internal

auditors routinely capture information on performance effectiveness and operational

efficiency, only 2.5% agreed and 20.0% disagreed with the question. This information implies

that the internal audit captures information on performance effectiveness and operational

efficiency but not routinely. This may be due to the months that are left out minus carrying

out performance appraisals. According to the interview the researcher had with the internal

Auditor of NLG, performance appraisals are carried out annually.

4.3.1 Findings on whether the organization’s senior management is receptive to all

communications controls including the bad news.

According to the findings in table 19 above, 5% strongly agreed 62.5% were in support of the

question that the organization’s senior management is receptive to all communications

controls including the bad news and 32.5% of the respondents disagreed. This generally

implies that the organization’s senior management is not receptive to all communications and

which also hinders the internal auditor’s judgements and recommendations and hence a

contribution to the weak internal audit function and the current poor performance of the Local

Government.

Table 19: Senior management’s reception to all communications

2 5.0 5.0 5.0 25 62.5 62.5 67.5 13 32.5 32.5 100.0 40 100.0 100.0

Response

Strongly Agree Agree Disagree Total


Cumulative Percent


30

4.3.2 Findings on whether the importance of risk management and controls has been

communicated through out the organization

According to table 20 above, only 7.5% of the respondents strongly agreed that the

importance of risk management and controls has been communicated through out the

organization, 40% agreed in support of them, 7.5% were not sure and 45% disagreed.

Generally implying that, there is a relatively weak control system of information and

communication in Nakaseke Local Government and hence a contributing factor to the weak

internal audit functions and the current poor performance of the Local Government.

(v) Monitoring

4.3.3 Findings on whether the internal audit has a comprehensive internal monitoring

program.

Table 21 above show that 47.5% of the respondents strongly agreed that the internal audit has

a comprehensive internal monitoring program and 52.5% were in support of them with none

disagreeing. This implies that there is a strong and comprehensive monitoring program with

in the Local Government and hence may be the contributing factor to the fair performance of

the internal audit functions and the performance of the Local Government.

Table 21: Comprehensive internal monitoring program of the internal audit.

19 47.5 47.5 47.5 21 52.5 52.5 100.0 40 100.0 100.0

Response

Strongly Agree Agree Total


Cumulative Percent


Table 20: Communications on the importance of risk management and controls

3 7.5 7.5 7.5 16 40.0 40.0 47.5 3 7.5 7.5 55.0

18 45.0 45.0 100.0 40


100.0 100.0

Response

Strongly Agree Agree Not Sure Disagree Total


Cumulative Percent

31

4.3.4 Findings on whether the internal audit through its monitoring function has

enhanced the organizations corporate code of conduct

According to the table above, 67.5% strongly agreed that the internal audit through its

monitoring function has enhanced the organizations corporate code of conduct, 32.5% were in

support of them, and none disagreed. This implies that the internal audit function of Nakaseke

Local Government enhances the organization corporate code of conduct through its

monitoring program hence effective audit work and the fair performance of the organisation.

4.3.5 Performance of local governments

According to the work plan of the year beginning July 2007 and the performance reports of

the year ending June 2008, the local government reported a satisfactory performance r of 75%

in the provision of works and water, un satisfactory reports of 15% and 10% in the

construction of schools, classrooms, toilets and teacher’s houses and in the provision of health

services respectively as most of the planned activities had not been implemented by the end of

the financial year June 2008 as they are explained in the findings below.

4.3.6 Findings on whether the district local government provides works and water

facilities to the community in terms of roads rehabilitation and maintenance

According to table 23 of findings above, 35%of the respondents strongly agreed with the

question, 60% were in support of them and 2.5%were not sure and only 2.5% disagreed.

Table 23: Provision of works and water facilities to the community by the district

14 35.0 35.0 35.0 24 60.0 60.0 95.0 1 2.5 2.5 97.5 1 2.5 2.5 100.0


40 100.0 100.0

Response


Valid


Percent

Table 22: Enhancement of the organisation’s corporate code of conduct by the Internal Audit

27 67.5 67.5 67.5 13 32.5 32.5 100.0 40 100.0 100.0

Response

Strongly Agree Agree Total


Cumulative Percent


32

This implies that the district local government provide quite satisfactory services as regards

to the provision of works and water facilities to the community and hence a better

performance of the local government.

4.3.7 Findings on whether the district local government carter for the construction of

teachers houses, classrooms, Toilets and offices in all government primary schools.

According to table 24 above, only 2.5% strongly agree and 37.5% agree that the district local

government carter for the construction of teacher’s houses, classrooms, toilets and offices in

all government primary schools. 32.5% disagree, 5% strongly disagree and 22.5% are not

sure. This generally implies that not all services are provided to government primary schools.

From the information the researcher got from the Work plan of the year ending June 2008,

only 2 toilets had been built, 3 head teacher’s houses had been renovated and no class had

been constructed or renovated in the whole district which clearly indicate un satisfactory

services to the public.

4.3.8 Findings on whether the district local government provides health services such as

medicine, immunization, counselling, drugs in all health units free of charge.

Table 25: Provision of health services such as medicine, immunisation and drugs.

2 5.0 5.0 5.0 15 37.5 37.5 42.5 9 22.5 22.5 65.0

14 35.0 35.0 100.0 40 100.0 100.0

Response


Valid


Percent


Table 24: Construction of teacher’s houses, classrooms, toilets and offices.

1 2.5 2.5 2.5 15 37.5 37.5 40.0 9 22.5 22.5 62.5

13 32.5 32.5 95.0 2 5.0 5.0 100.0


40 100.0 100.0

Strongly Agree Agree Not Sure Disagree Strongly Disagree Total

Valid


Percent

33

The findings in table 25 above show that 35% disagreed with the question that the district

local government provides health services such as medicine, drugs immunization, and

counselling in all health units free of charge. 22.5% were not sure 37.5% agreed and only 5%

strongly agreed. Form the findings it is clear that not all services are provided free of charge.

According to the Board of survey report of the year ending June 2008 that the researcher

accessed, 75% of the health units within the district had no enough drugs whereby some were

soon expiring. This therefore prompts the sale of some services within the health units.

4.3.9 Findings on whether Local Government activities are implemented as planned in

the Work plan.

From the findings presented by table 26 above 65% agreed and 20% strongly agreed that the

local government activities are implemented as planned in the district Workplan, 7.5%

disagreed and 7.5% strongly disagreed. This implies that local government activities are

implemented as planned in the district Work plan. However the percentage that disagreed and

that that strongly disagreed;7.5% and 7.5% indicates that not in all cases are activities

implemented as planned in the workplan and hence the fair performance of Nakaseke Local

Government.

4.4.0 Findings on whether the District Publi Accounts Committee always reviews

internal Audit reports.

Table 27: Review of Audit reports by the Public Accounts Committee

ccommit

27 67.5 67.5 67.5 13 32.5 32.5 100.0 40 100.0 100.0

Response

Agree Disagree Total


Cumulative Percent

Source: Primary Data .

Table 26: Implementation of local government activities as planned in the Work plan

8 20.0 20.0 20.0 26 65.0 65.0 85.0 3 7.5 7.5 92.5 3 7.5 7.5 100.0

40 100.0 100.0

Response

Strongly Agree Agree Disagree Strongly Disagree Total


Cumulative Percent


34

Form the findings given in table 27 above, 67.5% agreed that the District Public Accounts

Committee always reviews internal Audit reports however 32.5%disagreed. This implies that

the district Public Accounts Committee irregularly reviews the Audit reports which also

results to some manipulations and hence may be a contributing factor to the current poor

performance of the local government.

4.4.2 Findings on whether there are no cases of diversion of public funds for personal

benefit within the Local Governments of Uganda.

According to findings in the table above, 7.5% strongly agreed that there are no cases of

diversion of public fund for personal benefit, 37.5% agreed with them, 10% were not sure,

22.5%disagree and 22.5% strongly disagree. This implies that cases of diversion of public

funds for personal benefit are quite many with the local government of Uganda. This could be

due to irregular review of the audit report hence a contributing factor to the current poor

performance of the Local Government.

4.4.3 Findings on the relationship between internal audit function and the performance

of local governments of Uganda

The third research question sought to analyze the relationship between internal audit function

and the performance of local governments of Uganda. Correlation tests were run to establish

this relationship. The parameters grouped in determinants of internal audit functionality were,

internal controls and independence. It is believed that when internal controls are in place and

working, and the auditors are not interfered with during their conducts of activit ies then

internal audit will be functional and will be in position to submit quality information about

Table 28: Diversion of public funds for personal benefit.

3 7.5 7.5 7.5 15 37.5 37.5 45.0 4 10.0 10.0 55.0 9 22.5 22.5 77.5 9 22.5 22.5 100.0


40 100.0 100.0

Response

Strongly Agree Agree Not Sure Disagree Strongly Disagree Total


Cumulative Percent

35

activities of the organization to stake holders for the betterment of their organization’s

performance.

As a result of both the independent variable being interval scaled in nature, the Pearson’s

correlation test was run to establish the relationship between the independent variable and the

dependent variable. The independent variable was internal audit function which in it included

the control systems and independence whereas the dependent variable was performance of

local governments of Uganda. The results are presented in the table below

In general, the findings in the table above reveals that internal audit is significant and

positively related to performance (r = 0.963**, PV = 0.01). The positive correlation

coefficient of 0.963 indicates a positive relation between internal audit function and

performance of the local government. Hence having in place a well established audit function

will lead to improved performance whereas a poorly established internal audit function will

lead to the poor performance of the local government.

Correlations

1 .963 **

. .000

40 40

.963 ** 1

.000 .

40 40

Pearson Correlation

Sig. (2-tailed)

N

Pearson Correlation

Sig. (2-tailed)

N


INTERNAL

AUDIT

PERFORMANCE

OF LOCAL

GOVERNMENTS

INTERNAL AUDIT PERFORMANCE

Correlation is significant at the 0.01 level (2-tailed). **.

36

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This study was designed and carried out to establish the performance of internal Audit in

Local Governments and performance of Local Governments as a whole. It also stabled the

relationship between internal Audit and performance of Local governments. It investigated

the impact of internal Audit on the performance of Local Governments. Internal Audit was

assumed to depend on internal control systems and independence while performance of local

governments was provided by aspects of performance indicators of school infrastructure,

health services, and works and water

5.2 Summary of findings

5.2.1 Performance of internal Audit

The findings revealed that on average the performance of internal Audit in Nakaseke Local

Government is significantly affected by internal controls especially risk assessment,

information and communications, and finally by auditor’s independence this makes their

performance fairly satisfactory. The internal Auditors are not so independent when carrying

out their work as they are influenced by both the politicians and management. Internal control

systems were found to be inappropriate and hence impacting negatively on the performance of

internal Audit.

5.2.2 Performance of Local Governments

The findings show the Local Government performance has generally been fairy satisfactory as

can be evidenced by the services rendered in health, water and works, and in schools. Better

performance was hampered due to some loopholes in the system being attributable to the

weak internal Audit function resulting from lack of complete independence on internal

Auditors, and inappropriate internal controls. According to the work plan of the year

beginning July 2007 and the performance reports of the year ending June 2008, the local

government was performing fairly by providing quite satisfactory services to the public of

75% in the provision of works and water, and quite un satisfactory services of 15% and 10%

in construction of schools and in the provision of health services respectively as most of the

planned activities had not been implemented by the end of the financial year June 2008.

37

5.2.3 Relationship between Internal Audit and Performance of Local Governments

Findings reveal that internal controls and Independence have direct influence on the

performance of the local Governments The positive correlation coefficient of 0.963, PV= 0.01

indicates a positive relation between internal audit function and performance of the local

government. A perfect internal audit function leads to better services delivery.

(a) Internal control systems

The findings revealed that there is inappropriate internal control system in Nakaseke district,

which leads to moderate Local Government performance. These internal control systems are

weak and are subject to manipulations and this affect the performance of internal Audit and

the performance of Local governments as a whole. Weak internal control system negatively

impact on the performance of internal Auditors since internal control contracts such as

management policies and management procedures are part of internal Auditor’s reference

when executing their work.

(b) Independence

The research findings show that independence narrowly positively and significantly relate to

Local Government performance. This would mean that internal Auditor’s independence

results into an improvement in performance, as the loopholes are independently reported on

the solutions to these improvements suggested. It also revealed that Nakaseke district internal

Auditors are in some cases interfered with, when executing their duties, by the political

leaders.

5.3 Summary of conclusions

The study concludes that; there exist significant relationships between the variables of study

as conceptualized. Internal Audit being significantly and highly positive related to

performance of Local Governments; internal control system are significantly and moderately

related to performance where as Independence of Auditors was found out to be significantly

and slightly related to performance of government. Absence of political interference on

internal Auditor’s work leads to a good internal Audit capable of combating financial

mismanagement and hence better performance of Local Government. Likewise appropriate

38

internal control systems render the internal Audit strong and hence improve Local

Government’s performance.

5.4 Recommendations

The findings revealed that internal Auditors were performing their duties as required of them

due to lack of complete independence of internal Auditors arising out of some elements of

political leaders intervention in Audit work and also due to inappropriate internal control

system mainly being attributed to the weak elements of risk assessment, and information and

communication. In a bid to improve performance, it is recommendable for the district

management to ensure that audit reports are always reviewed; that communication between

the internal auditor and the senior management is effective, that internal audit moves away

from being reactive to being proactive, that also internal auditor identifies areas of risk within

the organisation and that activities also be implemented as planned in the work plan. Further

the political leaders should know their limit in the audit work. According to the internal

auditor of the district, quick action should be taken to the recommendations made by him to

the district management.

5.5 Areas of further research

The findings of the research appear to indicate that political leaders don’t know their

role in Local government management. This necessitates a need to study the roles of

politicians and the performance of Local Governments.

From this study it can also be observed that there are moderate internal controls in

Local governments and that work plans are not strictly followed when implementing

activities. This therefore calls for a research to study whether there could exist a

relationship between internal controls and work plan performance in local

government.

39

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42

APPENDICES

APPENDIX I: QUESTIONNAIRE

MAKERERE UNIVERSITY

Dear/Madam

I am Alinaitwe Jennifer a student at Makerere University carrying out academic research

aimed at investigating the internal audit and performance of Nakaseke Local Government.

I kindly request you to spare me some minutes of your time to respond to the questions below

For the purpose of the requirement of the award of commerce degree of Makerere University

your answers will be treated with utmost confidentiality.

Thank you for making this study a success

PART A

Personal Data

1. Sex:

Male Female

2. What is your age bracket?

18 – 27 years 28 - 37 years 38 – 47years 48 years and above

3. Level of Education

Post graduate Degree holder Diploma Certificate

Others (specify)……………………………..

4. In which department do you work?

Accounts Finance Internal Audit

Any other (specify)…………………………….

5. How long have you worked with the organization?

Less than 1 year 1 – 5 years More than 5 years

PART B

43

Please tick appropriately: (S/A= strongly Agree, A= Agree, N/S= Not sure, D/A= Disagree,

S/D= Strongly Disagree)

Independence is mandatory in Auditing and is particularly important that the internal Auditors

be independent of the activities they Audit in order to have an effective internal Audit

function.

S/A A N/S D/A S/D

6 Internal Audit department is independent from other

departments

7 The reporting relationship of internal Audit is appropriate

8 The internal Audit has access to departmental heads, the

accounting officers, and the organization’s records

9 Auditors carry out their work freely and with objectivity

10 Internal Auditors strictly follow internal controls when

verifying transactions

11 Political leaders usually influence auditors work

PART C

The different control elements have been put in place by the internal Audit to safeguard

assets, comply with laws and regulations, ensure the completeness and correctness of

accounting data, promote efficiency and encourage adherence to management.

S/A A N/S D/A S/D

(i) Control environment

12 Internal audit is consistent with the organization’s size,

complexity of operations and level of growth

13 The auditor possesses the skill and knowledge

14 The internal audit operates with a formal charter approved

by the board

(ii) Risk Assessment

44

S/A A N/S D/S S/D

15 Internal audit facilitates risk and self- control assessment

16 There are clear management statements on risk

management and internal controls in the organization

17 Internal audit identifies areas of risk within the

organization and structures the overall audit approach to

cover these areas of risk

(iii) Control Activities

18 Internal audit identifies and profiles its members needs and

expectations

19 Internal audit has moved away from being reactive to being

proactive

(iv) Information and communication

20 Internal routinely captures and reports information on

performance effectiveness and operational efficiency.

21 The organization’s senior management is receptive to all

communications controls including bad news

22 The importance of risk management and controls has been

communicated throughout the organization

(v) Monitoring

23 Internal audit has a comprehensive internal monitoring

program

24 Internal audit through its monitoring function has enhanced

the organizations corporate code of conduct

Performance of Local Government

25 The Local Government provides works and water facilities

to the community in terms of road rehabilitation and

45

maintenance

26 The district local government carter for the construction of

teacher’s houses, classrooms, Toilets and offices in all

government primary schools

27 The district Local Government provides health services

such as Medicine, Immunization, counseling, Drugs in all

health units free of charge

28 In all cases, Local Government activities are implemented

as planned in the Work plan.

29 The district Public Accounts Committee always reviews

internal Audit report

30 There no cases of diversion of public funds for personal

benefit

PART D

Assessing the relationship between the internal Audit and performance of Local Government.

S/A A N/S D/A S/D

31 he strength of internal Audit influences the level of

performance

32 Good policies and practices of the internal audit

have a positive bearing on performance

33 Internal controls provide reliable financial reporting

for management decisions and improve performance

34 Internal Audit leads to provision of quality services

to the public

Interview guide

46

1. How long has Nakaseke Local Government been in place?

2. Is there an established internal control system?

3. How often do you carry out performance appraisal?

4. How has been the performance of Nakaseke Local Government report past three years

5. What recommendations and suggestions can you make for Nakaseke

47

APPENDIX II: INTRODUCTORY LETTER

intrnal audit function and performance of local

Documents